After failing to sustain an afternoon recovery attempt, stocks moved back to the downside going into the close of trading on Tuesday. The major averages all ended the day firmly in negative territory, partly offsetting the standout gains posted in the previous session.

While profit taking contributed to some weakness in the markets, selling pressure remained relatively subdued, helping the major averages to hold onto the bulk of Monday's gains.

For much of the session, traders were keeping a close eye on Capitol Hill, with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner testifying before the House Financial Services Committee.

During his testimony, Geithner said the near-collapse of AIG (AIG) highlights broad failures of the U.S. financial system, and he pledged to work on improving the regulatory structure in order to prevent another similar situation.

I share the anger and frustration of the American people, not just about the compensation practices at AIG and in other parts of our financial system, but that our system permitted a scale of risk-taking that has caused grave damage to the fortunes of all Americans, Geithner said.

Bernanke added that the bonuses paid to employees of AIG were highly inappropriate. At the same time, Bernanke outlined the reasoning behind the government's repeated interventions to prop up AIG despite severe mismanagement within the embattled insurance giant.

The Fed Chairman noted that AIG must scrupulously avoid any excessive and unwarranted compensation.

We have pressed AIG to ensure that all compensation decisions are covered by robust corporate governance, including internal review, review by the Compensation Committee of the Board of Directors, and consultations with outside experts, Bernanke said.

In an interview with RTT News, Barry Ritholtz, CEO and director of equity research at Fusion IQ, discussed the backlash surrounding AIG's $165 million bonus payouts, calling the bonuses absurd and offensive but a minor issue.

Ritholtz advised investors to keep an eye on the big picture, emphasizing that people should be more upset that AIG was bailed out in the first place. This has become kind of a sideshow, Ritholtz said.

However, the attacks on AIG have pushed other financial groups to work to return government funds as soon as possible. According to the Wall Street Journal, Goldman Sachs (GS) may sell its stake in the Industrial and Commercial Bank of China to help it repay the $10 billion it received under the TARP.

The major averages pulled back to new lows for the session in late-day trading, although they ended the session just off their worst levels. The Dow closed down 115.65 points or 1.5 percent at 7,660.21, the Nasdaq closed down 37.34 points or 2.4 percent at 1,518.43 and the S&P 500 closed down 16.58 points or 2 percent at 806.34.

Sector News

After a long day of weakness, real estate stocks ultimately ended the session with some of the widest losses of the day, as reflected by the 8.6 percent loss posted by the Morgan Stanley REIT Index. The loss by the index came after it ended the previous session up 17.2 percent.

Within the real estate sector, FelCor Lodging Trust Inc. (FCH) showed a particularly steep decline, closing down 13.6 percent. With the loss, the stock ended the session well off a recent nearly two-month closing high.

Banking and health insurance stocks also closed considerably lower on the session, with the Kbw Bank Index closing down 7.3 percent and the Morgan Stanley Healthcare Payor Index closing down 4.4 percent.

Brokerage stocks as well as some natural gas stocks also closed sharply lower. Additionally, after the International Air Transport Association announced a lower outlook for the airline industry, the Amex Airline Index closed down 3.2 percent.

The IATA said it now expects the industry to report a loss of $4.7 billion in 2009 compared to its December forecast for a loss of $2.5 billion.

While most of the other major sectors also showed notable downward moves over the course of the trading session, some computer hardware stocks bucked the downtrend.

Dow Components

The lower close by the Dow came as the vast majority of the components of the blue chip index closed below the unchanged line, with only DuPont (DD), Boeing (BA), and Kraft (KFT) closing higher. While DuPont and Boeing closed up 1.9 percent and 1.7 percent, respectively, Kraft posted a more modest gain.

On the downside, banking stocks led the decline, with one of the worst performances coming from JP Morgan (JPM), which ended the session down 8.7 percent. With the loss, JP Morgan pulled back well off the two and a half month closing high it set in the previous session.

Bank of America (BAC), General Motors (GM), and American Express (AXP) also suffered notable losses, closing down 7.1 percent, 6 percent, and 3.8 percent, respectively.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region posted substantial gains on Tuesday, benefiting from the rally seen on Wall Street overnight. Japan's benchmark Nikkei 225 Index extended a recent upward move with a 3.3 percent gain.

Meanwhile, the major European markets ultimately closed mixed. While the U.K.'s FTSE 100 Index ended the session down 1.1 percent, the French CAC 40 Index and the German DAX Index posted gains of 0.2 percent and 0.3 percent, respectively.

In the bond market, treasuries showed a substantial rally going into the close after the Federal Reserve revealed that it plans to begin buying long-term treasuries on Wednesday. The benchmark ten-year note closed modestly higher after lingering in the red for much of the day.

Looking Ahead

While there were no major economic reports released today, trading on Wednesday could be impacted by the release of reports on durable goods orders and new home sales. Traders are also likely to keep an eye on speeches from Fed Presidents Yellen and Pinalto.

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